Guidlines for setting the inter-bank lending rate will be tightened, bankers have said.
The way in which the London Interbank Offered Rate (LIBOR) is set is to be changed, the British Bankers' Association (BBA) has announced.
This could have a big impact on the global financial markets, as LIBOR currently functions as the most popular benchmark for inter-bank lending: the rate at which financial firms borrow from each other. According to the body, which oversees LIBOR, banks' reports will now be more rigorously scrutinised - and the committees which oversee the day-to-day running of the rate will also be expanded.
LIBOR, which currently works through a daily survey of 16 banks which report the rates at which they are borrowing from each other in different currencies and time-scales, is crucial to the smooth running of financial systems across the world. It is the most widely used index for setting rates for various financial products: BBA says that around $350 trillion of assets depend on the rate.
High LIBOR, which is generally caused by banks becoming more reluctant to lend to each other, was a key feature of the credit crunch, and it is understood that it is the financial crisis which provided the impetus for the BBA's newly-announced changes. Banks have been accused by analysts of deliberately under-reporting their borrowing rates in order to avoid being seen as "risky" to lend to.
BBA chief executive Angela Knight said: "BBA LIBOR has stood the test of time: it has been published on every business day since 1985 and is among the most transparent indices in the world. These changes will further strengthen BBA LIBOR and the confidence of its many users."
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